In this article, I will explain what Futures Trading means, how does it work, and what are their pros and cons.
What is Futures Trading?
Futures trading is a way of speculating on the price of assets without having to own them in real life.
Crypto futures are the same thing, meaning they represent a method of trading the future price action of crypto assets. The most common ones are, of course, Bitcoin futures, which were released in 2019.
They are a part of a larger category of trading instruments that bear the name of “Derivatives.”
How Does Futures Trading Work?
Long story short, a futures contract represents an agreement between two parties to either purchase or sell crypto on a date that was established in advance, for a price that was established in advance. You could call it a bet on the future price movement.
Let’s say that you predict that the price of Bitcoin will increase by the end of this month. You would need to open a long position on it by purchasing a Bitcoin futures contract that has a monthly expiry date.
On the other hand, if you think that the price of Bitcoin will take a dive, you can go long. When the contractual period expires, the two parties that were part of the trade settle and the contract is closed.
What Are the Benefits of Futures Trading?
Crypto futures are pretty popular, actually, and this is why some people choose to get involved with them: they are seen as being convenient, they have higher potential profits, and flexible trading strategies.
The convenience comes from the fact that trading futures is easy even for people new to the game – it is actually even easier than trading actual crypto.
Higher potential profits refer to the fact that when you trade crypto futures with leverage, the gains are usually bigger. Some exchanges allow you to set the leverage up to 100x, which means that having a capital of just $10 can let you enter a position worth $1,000.
Regarding flexible trading strategies, it is worth mentioning that trading strategies work better with crypto futures than with the trade of crypto – even more so when we talk about intra-day trading. Crypto futures also let you go short without having to deal with any blockers.
What Are the Cons of Futures Trading?
Some experts think that the underlying crypto market hasn’t matured enough in order for a futures market to even exist.
They point to the volatility of Bitcoin as a minus, one that may even spread to other parts of the futures market.
Yet, as of now, no major incidents that involved crypto futures platforms took place.